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Friday, May 14, 2021

Explained: Why markets are rising despite Covid-19 surge, what you should do

Market participants seem to be taking solace from the government decision not to go for a full-scale lockdown, the impending extension of vaccination to all adults, and hopes of things normalising in a couple of months.

Written by Sandeep Singh | New Delhi |
Updated: May 6, 2021 9:14:29 am
The Bombay Stock Exchange on Dalal Street (Express Photo: Nirmal Harindran, File)

As if in disregard for rising Covid-19 numbers — new cases touched 3.75 lakh on Wednesday — the Sensex has gained 1,887 points or 3.9% over the last four trading sessions, to close at 49,765 on Thursday. Market participants seem to be taking solace from the government decision not to go for a full-scale lockdown, the impending extension of vaccination to all adults, and hopes of things normalising in a couple of months.

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Is the stock market detached from ground reality?

At a time everyone is focused on protecting themselves from the coronavirus, with even corporates are diverting their industrial resources towards the manufacture of oxygen, the rally in the markets has taken many by surprise. “I think currently, there is a huge gap between the ground reality and market and I have a feeling that the ground reality will soon catch up. I also feel that foreign portfolio investment outflow, which started in April, will gather pace in the coming days and weeks if the healthcare situation does not come under control,” said the founder and CEO of a leading financial services firm.

Economists say that while the market is positively linked to economic growth in long periods of 10-20 years, the same cannot be said for the short term. “While the market is always forward looking, in the short term it is driven by daily news flow, and the news around vaccination of 18 and above, shortage of vaccines, rise or fall in daily cases etc are currently driving market movement. Given the fact that in the next 3-4 years the economy is expected to go back to 7-8% GDP growth rates, one can only guess the levels at which the Sensex would trade at in three to four years,” said Madan Sabnavis, chief economist at Care Ratings. He added, however, that over the last one year there has been no linkage between the economy and the market movement.

Why is the market rising?

A good earning season (Q4 2021 results) has come as a big positive for the markets; also, many feel the markets are looking at a bright scenario two months ahead as they always trade over the future outlook.

If the absence of a nationwide lockdown and the limited impact of lockdowns announced by the states have reduced anxiety, there is optimism surrounding the vaccination programme. Also, banks, which are considered a proxy for the economy, did not face asset quality crisis as had been expected.

The market’s big hope is on the vaccination drive. “While infection and mortality is low among people who have been vaccinated, the market is optimistic that in two months’ time when India would have vaccinated around 35-40 crore people, it will result in free travel and near opening up of the economy. There is a sense that it is a pain of one to two months and normalisation will be faster. The hope is that the second quarter would be better and the festive season will be quite strong,” said Pankaj Pandey, head of research at ICICIdirect.com.

About the government’s decision to open vaccination for people above 18, a fund manager who did not wish to be named said since the majority of the workers in factories are up to the ages of 40-45, quick vaccination would ensure proper functioning of factories and better economic activity across the country.

Even a senior official with CII said, “We were pushing for vaccination of all above the age of 18 with the government as most workers employed in factories fall in the ages of 20 to 40. Their vaccination will be an additional security for industries to continue operations and avoid a full-scale lockdown.”

Also, the fact that most countries with resources are coming to India’s help has boosted sentiment. Over the last few days, while the US removed restrictions on export of vaccine raw materials, countries are helping India with oxygen concentrators, ventilators, vaccines and other materials.

So who is buying in the market?

If global liquidity and inflow of funds by foreign portfolio investors (FPIs) led to the domestic market rally that began in October 2020, the current strength in the market is being provided by domestic institutional investors (DIIs) — mutual funds and insurance companies among others. In April (until date), DIIs have invested a net of Rs 9,669 crore as against a net outflow of Rs 11,101 crore by FPIs. Market data shows that for the first time in seven months, DIIs have overtaken the FPIs in net investment in Indian equities.

In contrast, in the period October 2020-March 2021, while FPIs had pumped in a net of Rs 1.97 lakh crore that lifted the Sensex by over 31% from levels of 38,000 to over 50,000 in March, DIIs were busy selling. In the five-month period between October and February, DIIs pulled out a net of Rs 1.31 lakh crore from domestic equities.

While FPIs have been concerned over the rise in Covid cases around the world (especially in India) and are exercising caution, market participants say domestic investments have been strong on a variety of factors and on hopes that the impact on the economy will not be as hard as last year.

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Can there be a correction, and what should you do?

While FPIs have been selling from the Indian markets, there are some who feel they may increase the pace of the sell-off if the healthcare situation does not come under control soon. If there is a sharp outflow of FPI money, there could be a correction in the markets. So it is a possibility. However, if things start improving in a week or two, markets may gain confidence and renewed strength.

Experts say investors should not look to speculate in the market at this time. While existing investments should continue, fresh investments for the long term can be made. Stock investments should, however, be in high-quality companies that are better equipped to handle the current crisis and are expected to increase their market share in the current environment.

As for profit booking, for those who are in need of funds and want to keep higher liquidity with themselves, since the markets are back at high levels, they could consider some profit booking.

Those who don’t need the money for the next one or two years can stay with their existing investments.

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